Oil — not to mention oil stocks — has been on a wild ride in the past month. From trading around $13 a barrel, to diving into the red, it has been truly spectacular. Crude oil has since rebounded to its current price in the mid-$30 range.
Granted, there were some reasons for this ride. The global economic slowdown meant demand was going to drop off a cliff, so oil prices tanked. A weaker dollar — remember, most oil contracts are in dollars — also made oil less expensive in real terms.
But a drop in prices also shut down oil exploration and production firms, and OPEC has slashed its production. Also, with the U.S. just about the only country with positive interest rates, money is flowing back into U.S. Treasury bonds and strengthening the dollar.
All this has happened so swiftly that it’s enough to give people whiplash — and the desire to bottom fish. But there are plenty of challenges left for the industry.
The sector is a mess and the seven oil stocks to avoid below are representative of the whole sector. I’m certainly staying away for my newsletters like Growth Investor. Even the best oil companies aren’t worth buying now.
- Exxon Mobil (NYSE:XOM)
- Occidental Petroleum (NYSE:OXY)
- Concho Resources (NYSE:CXO)
- Continental Resources (NYSE:CLR)
- Marathon Oil (NYSE:MRO)
- Cimarex Energy (NYSE:XEC)
- Petroleo Brasileiro (NYSE:PBR)
Oil Stocks: Exxon Mobil (XOM)
This company goes all the back to John D. Rockefeller’s Standard Oil back in 1882.
By 1909, Standard Oil was so dominant and powerful that Teddy Roosevelt’s U.S. Department of Justice sought to break it up — and it did by 1911.
But that didn’t stop this massive empire from growing all the same. Now, it has a $191 billion market capitalization and is the largest publicly traded oil firm in the world. Its operations are spread across the globe.
The problem is, its size now is a disadvantage in a global economic crisis. There’s no place to find relief. Shutting down operations can be more expensive than keeping them running, not to mention the costs of bringing them back online at some point.
And it’s hard for a giant like this to hedge production well in this kind of environment.
The stock is off nearly 40% in the past 12 months, 35% year-to-date. Its 7.8% dividend is attractive but there’s a decent chance there’s still significant downside risk here.
Occidental Petroleum (OXY)
This energy patch player has also seen its share of ups and downs since it was founded in 1920.
It’s market cap is more than 10x smaller than XOM’s, but it’s still a big global player. Last year it made headlines when it bought big E&P firm Anadarko Petroleum for $55 billion, the largest acquisition in the oil patch for decades.
The problem is, 80% of that deal was in cash, not stock. And that means OXY took on a lot of debt to get the firm. Low oil prices make it very difficult to service that debt and OXY has been working hard to divest some of its holdings to stay afloat until oil prices stabilize.
Selling assets in a bad market is very difficult. If you can find buyers, they’re not going to give you top dollar. And that means more losses.
The stock is off 75% in the past year and 65% year-to-date. And its sub-3% dividend isn’t even tempting. Not when growth and income can still be found elsewhere.
Concho Resources (CXO)
Concho Resources is a good-sized E&P play that focuses on domestic production primarily in the Delaware Basin and Midland Basin shale fields.
Its $12 billion market cap hasn’t helped, since E&P firms are usually the ones that get hit first — and hardest — by any significant drop in demand.
These firms are highly leveraged to the price of oil. That’s a good thing when oil prices are rising due to demand. But in the current situation, it’s tough for them to stay productive. And they’re usually carrying a fair amount of debt, which becomes harder to pay in current conditions.
Don’t think that because oil prices have had a good week that the worst is behind us. We’re in hazy territory right now with the economy, and this rally could disappear overnight. There’s still too much downside risk left.
CXO is off 43% in the past 12 months, 37% year-to-date.
Continental Resources (CLR)
Next on my list of oil stocks to avoid is Continental Resources. This 53-year-old E&P is also a domestic producer in various shale fields around the U.S.
The greatest challenge for domestic E&Ps is the fact that OPEC and Russia are more than happy to hamstring U.S. production firms. U.S. production makes it hard for OPEC to control the prices the way it once did.
This tension among big producers is also used by China, the world’s largest oil importer, to manage relationships with OPEC and Russia. China is also starting to demand oil contracts in yuan rather than dollars, which undermines the dollar’s strength.
The point is, this is another piece in this global energy game. And some of these E&P players are only pawns.
The stock is off 64% in the past year and 60% year-to-date. It’s no time to dive in. They say “data is the new oil,” and that’s where I’m finding opportunity now.
Marathon Oil (MRO)
Founded in Houston in 1887, this E&P is a global player that has been around the block a few times. It has seen some real challenges over its lifespan — and it has endured.
And there’s no doubt it will continue to endure and grow. But this isn’t the time to wade in to MRO or other oil stocks on this list.
While developed nations have their challenges right now, developing countries have another, bigger set of challenges. Many of the countries where MRO operates could see regime change and potential nationalization of key industries.
That means on top of the fundamental risks of the energy patch, you have a whole new layer of political risk.
But again, this isn’t MRO’s first rodeo. It should be able to manage all these risks. The question is, do you want be invested in the company as it navigates these waters.
The stock is down 59% in the past year, 57% year-to-date.
Cimarex Energy (XEC)
With a $2.7 billion market cap, XEC is one of the smaller oil stocks on this list. It’s a U.S.-focused E&P that operates primarily in the Permian Basin as well as other properties in that region.
Last week it released first-quarter numbers and beat estimates. But now it’s slashing capital expenditure spending and trying to run lean and wait out this storm. No doubt Q2 won’t be as impressive.
While most E&Ps that got through the bear market in 2014 implemented technologies to make it cheaper to produce a barrel of oil, it still costs around $36 a barrel, which is below current prices.
XEC’s size and exposure make this a risky bet right now, at least until there’s more visibility.
The stock is off 57% in the past year, and 43% year to date. I’m happy to recommend other stocks that are still growing and pay dividends.
Petroleo Brasileiro (PBR)
This company is better known as Petrobras, and it’s the major oil company of Brazil.
Brazil has a huge amount of oil reserves, especially offshore. But the oil is very deep — about 2 miles down and then another mile through the seafloor there’s a massive “elephant” find, but it’s very challenging and expensive to drill.
Beyond all the potential, PBR has some significant challenges. The company had a massive corruption scandal that also involved many national politicians in the past few years.
And the Brazilian government owns about 64% of the company directly or indirectly. One of its more recent presidents was brought down by political scandal and the current president is also being investigated.
Add the novel coronavirus, where death tolls for the country continue to rise, and you have fertile ground for dysfunction. On the upside, PBR probably will never go bankrupt.
The stock is down 48% in the past 12 months, and 54% year to date.
These are just a few examples of oil stocks to avoid now. Sadly, this traditional income and growth sector is dead in the water these days.
Happily, growth and income investments are still to be found … elsewhere. I’ve got another example that might surprise you: artificial intelligence (AI)
The AI Master Key
If artificial intelligence sounds futuristic, even far-fetched — well, keep in mind, you’re already using it every day. If you’ve ever used Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Assistant or Apple’s (NASDAQ:AAPL) Siri … if you’ve had Netflix (NASDAQ:NFLX) recommend a movie or Zillow (NASDAQ:Z) recommend a house … even creating an email spam filter — then you’ve used artificial intelligence.
In this new world of AI everywhere, data becomes a hot commodity.
As scientists find even more applications for artificial intelligence — from hospitals to retail to self-driving cars — it’s incredible to imagine how much data will be involved.
To create AI programs in the first place, tech companies must collect vast amounts of data on human decisions. Data is what powers every AI system. As one AI researcher from the University of South Florida puts it, “data is the new oil.”
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Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.